Current issues in economics

USA China trade war – who would win?

After a third round of trade talks between China and the US ended in stalemate a US$100bn trade war is on the horizon. America has published a list of 1,300 Chinese products which it proposes to hit with a 25% tariff. China has it own list covering 106 categories. As the Chinese embassy in Washington DC said “As the Chinese saying goes, it is only polite to reciprocate.” See graph below from The Economist.

Historians of trade have an advantage over those who study wars of the military kind. Each side is a trade dispute lays out in detail the products to be affected. That makes it easier to analyse their strategies. Trump’s blunt attack targeting of a particular industry – steel and aluminium – is to supposedly make the industry in the US stronger. China retaliated by placing tariffs on US$0.2bn-worth of iron and steel tubes, pipes and hollow profiles, and US$1.2bn-worth of aluminium waste.

The US face a trade-off between protecting their own industries with import tariffs at the same time as increasing the cost of goods for its consumers. There is also the likelihood of causing disruptions to the US economy by increasing the cost of intermediate goods (aircraft parts, robots, semiconductors) which ultimately leads to higher prices.

Good long-run deal for China

It seems that China has the dominant position for the following reasons:

China can stop purchasing US aircraft

Impose an embargo on US soybean products

Dump US Treasury Bills and other securities

Chinese companies could reduce demand for US business services

The government could persuade firms not to buy US products

China is indirectly one of America’s biggest employers. China could look to buy all it commercial aircraft from European consortium Airbus rather than Boeing. That move alone wold cost 179,000 US jobs. China controls key components in global supply and production networks

Initially a trade war would mean job losses for both countries but in the long-run with China looking to develop a more domestic led consumption model the export market becomes less significant – Project Syndicate. See video below: